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Private Sector Development

An Economy that Works: Creating jobs for the 40+ million unemployed

Susan Lund's picture

Editor’s Note: The following is a guest contribution by Susan Lund, Director of Research at the McKinsey Global Institute. She will be speaking at the World Bank on the topic of job creation on January 24 as part of the FPD Chief Economist Talk series.

Perhaps no topic is more pressing today than the growing jobs and employment problem. We estimate that there are 40 million unemployed in high-income countries and tens of millions more who have dropped out of the workforce or are under-employed. Not only does this exact a toll in human misery and dampen lifetime economic prospects, but it also places a drag on aggregate demand and tax receipts at a time when both are sorely needed.

Unfortunately, these 40 million may just be the foretaste of what could be in store. Increasingly, the job market in developed economies is bifurcating: full-time employment, job security and rising incomes for high-skill, technically trained, and entrepreneurial workers—and the opposite for almost everyone else. Factories are becoming places of many robots and a few high-skill technicians. The modern office is becoming more virtual—a network of task specialists who may work remotely and are increasingly likely to be part-time or contract labor. Shops are online; those made of brick and mortar increasingly are self-serve and self-checkout.

What Do We Know about the Impact of Tax Reforms on Private Sector Development?

Miriam Bruhn's picture

I recently conducted a literature review on the impact of tax reforms on private sector development as part of the Investment Climate Impact Project.1 My goal was to take stock of what is currently known about the impact of reforms that the World Bank is supporting in this area and to identify the gaps in knowledge that we ought to fill by conducting more impact evaluations. While tax reforms can have a broad range of effects in the economy, the focus here was on private sector outcomes only, as measured by investment, tax evasion by formal firms, formal firm creation, and firms’ economic performance.

It turns out that most papers in this area study the impact of changing tax rates. Both cross-country and micro-level  studies suggest that lowering tax rates can increase investment, reduce tax evasion, promote formal firm creation and ultimately lead to an increase in firms’ sales and GDP growth overall. However, lowering tax rates also has important implications for government revenue and it is thus often difficult to balance the trade-offs between various goals of public policy.

Should Development Organizations be Hunting Gazelles?

David McKenzie's picture

Last week I presented some early findings from ongoing work at the IADB, at Innovations for Poverty Action’s SME initiative inaugural conference. There was a lot of interesting discussion about early results from efforts to improve management and skills in small and medium firms, discussion of the most appropriate ways of financing these firms and the extent to which a personal vs automated approach to determining creditworthiness can be used, and an interesting panel on policies towards the missing middle. However, the one theme that has got me thinking the most is something that seems to come up a lot in discussions of microenterprise development and SME programs recently, namely should development institutions and policymakers be directing fewer resources at microfirms and more at high-growth-potential enterprises or gazelles?

Gazelles are defined by the OECD to be all enterprises up to 5 years old with average annualised growth greater than 20% per annum, over a three year period, and which have 10 or more workers. Recent work in the US, and looking at firms around the world have emphasized the role of a subset of dynamic, fast-growing young firms in net job creation, leading to policymakers and practioners focused on job creation to think we should be devoting more effort to identifying and supporting these gazelles, and decrying the lack of venture capital markets in developing countries. For example, see this scoping note by Tom Gibson and Hugh Stevenson at the IFC.

Where You Work: How Does Gender Matter?

Mary Hallward-Driemeier's picture

Are businesses run by women less productive than businesses run by men? If we perform a very simple comparison of the average productivity of female and male-owned enterprises, we might answer “yes”. But if we look a bit more closely at the data, a large part of this gap is explained by the fact that women and men are doing different things. If you compare women and men in the same sectors and in similar types of enterprises, the gap shrinks dramatically. Where you work is more important than gender in accounting for the observed productivity gap.

Using data on over 9000 registered enterprises from 32 countries in Sub-Saharan Africa, we see a productivity gap of 6 percent. However, controlling for sector, size and capital intensity, the gap disappears (see chart 1). If we include unregistered firms in the analysis, the unconditional productivity gap widens, as women are disproportionately in the informal sector where productivity is even lower. Nevertheless, the same pattern holds: there is little gender performance gap between similar enterprises.

Financing Africa: Through the Crisis and Beyond

Thorsten Beck's picture

In mid-September, the African Development Bank, the German Federal Ministry for Economic Cooperation and Development and the World Bank will launch Financing Africa: Through the Crisis and Beyond , a comprehensive review documenting current and new trends in Africa’s financial sector and taking into account Africa’s many different experiences. During the coming weeks and leading up to the formal launch of the book in Ethiopia on September 15, we will give a sneak peek of the book’s main findings and recommendations. In this first post, we’ll summarize our main messages.

When Credit is More Than Just Financing: The Case of Trade Credit Contracts

Leora Klapper's picture

As most manufacturers around the world can attest, trade credit is an important source of external financing for firms of all sizes. Suppliers—some of whom may be small or credit constrained—generally offer working capital financing to their buyers, reported as accounts receivables (e.g. McMillan and Woodruff, 1999). Research has also demonstrated that trade credit can act as a substitute for bank credit during periods of monetary tightening or financial crisis (see, for example, Love et al., 2007).

Trade credit, however, is not used for financing purposes alone. Trade credit, it has been argued, is a way for a supplier to engage in price discrimination, giving favored or more powerful clients longer terms (see, for example, Giannetti, Burkart, and Ellingsen, 2011). Furthermore, trade credit may simply be customary in an industry, with this particular custom driven by economic rationales such as allowing buyers time to assess the quality of the supplied goods (Lee and Stowe, 1993).

Generating Jobs in Developing Countries: A Big Role for Small Firms

Asli Demirgüç-Kunt's picture

These days, job creation is a top priority for policymakers. What role do small and medium enterprises (SMEs) play in employment generation and economic recovery? Multi-billion dollar aid portfolios across countries are directed at fostering the growth of SMEs. However, there is little systematic research or data informing the various policies in support of SMEs, especially in developing countries. Moreover, the empirical evidence on the firm-size growth relationship has been mixed. Recent work of Haltiwanger, Jarmin, and Miranda (2010) in the U.S., suggests that (1) Startups and surviving young businesses are critical for job creation and contribute disproportionately to net growth and (2) There is no systematic relationship between firm size and growth after controlling for firm age. It is not clear whether these findings apply in developing countries where there are greater barriers to entrepreneurship, and where venture capital markets that finance young firms are not as well developed as in the US.

In a recent paper Meghana Ayyagari, Vojislav Maksimovic and I put together a database that presents consistent and comparable information on the contribution of SMEs and young firms to total employment, job creation, and growth across 99 developing economies. Our sample consists of 47,745 firms surveyed in the period 2006-2010. We then examine the relationship between firm size, age, employment, and productivity growth and how this varies with country income and find the following:

Should It Be our Business to Promote Business Training?

Bilal Zia's picture

Firms in developing countries face many constraints, from lack of access to finance and physical capital to poor infrastructure. Recently, however, there has been a growing focus among researchers on “managerial capital”, or business skills, as an important determinant of entrepreneurship in developing countries. Policymakers have been equally interested in the perceived deficit of managerial capital, and have been pouring resources into financial and business literacy education programs around the world (see my earlier post on The Fad of Financial Literacy?).

Yet we still have a very incomplete understanding of the effectiveness of these programs, and their specific impact on business outcomes. Until recently, there were only two completed randomized impact evaluations of business training programs in developing countries: one in Peru for rural women, which found positive effects on certain business practices but not on profits (Karlan and Valdivia, 2010), and the other in the Dominican Republic, which found that basic rules-of-thumb-based training had a greater effect on business outcomes than formal business training (Drexler, Fischer, and Schoar, 2010).

Where Do Women Work?

Mary Hallward-Driemeier's picture

The economic empowerment of women is gaining prominence in the development agenda. It is reflected in Millennium Development Goal 3 and will be the focus of the World Bank’s World Development Report 2012. Expanding women’s access to income generating opportunities is a key part of this objective. An important starting point is to understand where women work.

Two figures based on data from household and labor force surveys in 137 low- and middle-income countries help answer this question. Figure 1, focused only on women, reports the shares active in different types of employment. Figure 2, focused on the nonagricultural labor force (male and female), reports the share of workers in each employment category who are women. Thus the first shows the distribution of women across types of work, and the second the differences in the rates at which men and women are active in the same type of employment.

New Ideas in Business Growth

Miriam Bruhn's picture

My colleague Bilal Zia and I organized a conference on New Ideas in Business Growth: Financial Literacy, Firm Dynamics and Entrepreneurial Environment that took place at the World Bank last Wednesday. The conference brought together researchers and policy makers in the area of private sector development to share new findings about the types of policy interventions that are effective at promoting business growth. We decided to focus the discussion on three topics that have recently received increased attention from both a research and a policy angle: 1) business and financial literacy training 2) the business environment and 3) corporate governance and firm dynamics. The selection of these three topics also raised a larger question in my mind—should the research community spend so much of its effort on microenterprises, when larger firms may have much higher growth potential? That’s a question I’ll return to at the end of the post.

In recent years, many governments, international institutions, and NGOs around the world have been providing business and financial literacy training for entrepreneurs. However, so far, we know relatively little about the impact of this training on business performance and growth. In an effort to contribute to filling this knowledge gap, Bilal and I conducted a randomized control trial in Bosnia-Herzegovina, where we collaborated with a microfinance institution and an NGO to provide business and financial literacy training to young entrepreneurs.

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